Compare federal vs private student loans

When comparing federal loans vs private loans, the key difference is that federal loans are provided by the government and private loans are provided by banks, credit unions, and other financial institutions. Each has its own student loan eligibility criteria, application process, and terms and conditions.

Understand the difference between federal loans vs private loans

Whether you choose federal student loans or private student loans, you have to pay back the money you borrow, plus interest—whether you graduate or not. Student loans are legal agreements, so be sure you understand what you're signing. If something isn't clear, ask your school counselor or lender for help.


There are three types of federal loans for college:
In general, federal student loans provide additional flexibility in several areas than private student loans:
  • Borrowers don't need a credit check to be considered (except for the Federal PLUS Loans for parents and graduate students).
  • Some federal student loans offer income-driven repayment plans, where the rate of repayment is based on the borrower's salary after college.
  • Federal student loans allow the borrower to change their repayment plan even after they've taken out the loan.

It's important to consider federal student loans before you take out a private student loan because there are differences in interest rates, repayment options, and other features.

Private student loans can help you pay for college after you've explored scholarships, grants, and federal student loans.
  • Private student loans usually offer the choice of a fixed or variable interest rate. Fixed rates stay the same, giving you predictable monthly payments. Variable rates may go up or down due to an increase or decrease to the loan's index.
  • Private student loans offer different repayment plans—including options that allow you to make interest-only or fixed payments while you're in school. These in-school payments could lower your total student loan cost.
  • Some private student loans allow you to track your credit health for free with quarterly FICO Credit Scores.
  • Private student loans offer flexibility, since they can be taken out by a student (often with a cosigner), parent, or creditworthy individual (e.g. guardian or other relative).

This chart highlights the differences between federal loans vs private loans.

 

Differences between private loans vs federal loans

Federal Direct Subsidized & Unsubsidized Student Loansfootnote 1
Private student loans

FAFSA® required to apply

Requires applying directly with bank or credit union

Considers credit history

Borrowing limit determined by FAFSA®

Often allows borrowing up to cost of attendance (COA) less financial aid received

Cosigners may help increase chances of approval

Made to students based on financial need

(Direct Subsidized Loans only)

Allows change in repayment plan after borrowing

When to apply for private student loans and federal student loans

Federal student loans

To apply for federal student loans, the first thing you need to do is complete the Free Application for Federal Student Aid (FAFSA®). Looking for help? Our FAFSA® guide can walk you through all the questions to help you answer correctly and maximize your financial aid. In addition to federal student loans, the FAFSA® also determines your eligibility for other federal student aid like grants and work-study. You need to submit the FAFSA® to receive federal student aid.

 

Private student loans

You can apply for private student loans when you need to, as long as you plan enough time for the lender to process your loan and disburse (send) money to the school. However, if you’re applying for a full year, your lender may disburse the funds to your school each semester rather than all at once.

If you think you might need to borrow both federal and private student loans, always submit your FAFSA® first. You’ll receive a financial aid offer from the colleges you’ve been accepted to. After you learn how much aid you’re being offered, you’ll know how much you still need to borrow with a private student loan to have the funds that you need for college. 

Terms and conditions of federal loans vs private loans

All student loans—federal and private—include terms and conditions. Here are the most important items you should understand when taking out a loan for college:

  • Is this a federal student loan or private student loan?
  • Who is the servicer? 
  • Is there a cosigner on the loan? 
  • What is the interest rate?
  • Is the interest rate fixed or variable? 
  • When are you required to make payments—while in school or after?
  • What is the penalty for late payments?

Paying off federal loans vs private loans

There’s no definite answer when it comes to which can be paid off faster, federal student loans or private student loans. It depends on the amount of your loans, how much your payments are, your interest rate, and how much money you’re making after school:

  • How much is your monthly student loan payment? 
  • Did you choose a repayment plan where you make payments during school, or did you have a grace period after graduation? 
  • Is there a cosigner on the loan? Are they helping with payments? 
  • Are you keeping up with your payments and paying interest that accrues (grows) before it capitalizes (is added to your principal amount)? 

Tips for repaying your student loans

How student loans are different than other types of loans

Be sure to understand the difference between private student loans and personal loans. They sound similar, but there are important distinctions: 

  • Private student loans are for education, while personal loans can be used for things like consolidating credit card debt, making home improvements, or paying for a wedding. Some personal loans explicitly state they should not be used for post-secondary education or student loan debt. 
  • In general, private student loans have lower interest rates than personal loans. They can also offer the choice of a fixed or variable interest rate. A personal loan usually only offers a fixed interest rate, which can impact the amount of your payment. 
  • Private student loan funds are usually disbursed (sent) directly to your school’s financial aid office. Personal loan funds are deposited directly into the borrower’s bank account. 
  • Consider consulting with a tax and/or financial advisor to make sure you fully understand the differences. 

Frequently asked questions about federal student loans

Yes, you can take out both federal and private student loans to cover the costs for school, but it's important to stay organized and responsible. You'll have to pay back both types of loans, so track how much you borrow, understand the repayment terms, and make a plan for how you’ll pay it back after graduating. Staying on top of it now will make managing your loans much easier later on.

If you don't qualify for federal student loans, it might be due to not meeting eligibility criteria like enrollment status, academic progress, or citizenship requirements. But don't worry—there are other options. You can look into scholarships and grants, which don’t need to be repaid and can help cover your costs. You can also look into private student loans from banks or credit unions to help cover any remaining costs. But keep in mind you might need a cosigner if you don’t have a qualifying credit score.

If you’re not sure if your loan is federal or private, start by checking your loan paperwork and monthly statements. You can also check your lender’s account or where you make your monthly payments for more information. If you think you have a federal loan, log into the Federal Student Aid website with your FSA ID to confirm. If you’re paying a lender not listed there, your loan might be private.

Federal student loans usually have lower, fixed interest rates that stay the same for the duration of the loan. Private student loans can have either fixed rates that stay the same or variable rates that can change over time. It’s important to understand the different interest rates and how they will impact your loan.

Federal student loans are based on financial need and don’t require a credit check. To apply, fill out the Free Application for Federal Student Aid (FAFSA®). Private student loans depend on your credit score, and you might need a cosigner if your credit isn’t strong. To apply, you need to go through a bank or lender and fill out their application.

Student loans can give you some tax breaks. For both federal and private loans, you might be able to deduct up to $2,500 in interest on your taxes each year. This deduction is based on your income, not the type of loan you have. So, whether your loans are federal or private, you can still benefit from this tax break if you qualify. There’s also the American Opportunity Credit that offers up to $2,500 per student each year for the first four years of college. And the Lifetime Learning Credit gives up to $2,000 per student each year for any college or career school costs, including tuition, fees, and required books and supplies. Be sure to check with a tax advisor to determine specific tax implications.

Federal student loans usually get processed quickly once you fill out the FAFSA®, often within a few weeks. Private student loans can take a bit longer because they require credit checks and approval from the lender, which might take a few weeks to a couple of months. So, federal loans are generally faster to get than private ones.

Many federal student loans have set limits on how much you can borrow each year, depending on your year in school and your dependency status. Private loans vary by lender. If yours requires "school certification," your school must confirm your enrollment and make sure you borrow within the total cost of attendance, including federal loans, scholarships, and grants. It’s always a good idea to borrow federal loans first because they typically offer better terms.

Loans can impact your credit score because they show up on your credit report. Both federal and private loans can affect your score, especially if you miss payments or default. Federal loans usually have more flexible repayment options, which can help you avoid negative impacts. Overall, keeping up with payments on any loan is key to maintaining a good credit score.

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Learn more about your private student loan options

Whether you’re an undergraduate, graduate, business, dental, medical, or health professions student, you can find a private student loan designed to meet your needs.

Understand the student loan application process

Know what to expect when you apply for private student loans. Be ready with the information you need in the student loan application.

footnote Sallie Mae does not provide, and these materials are not meant to convey, financial, tax, or legal advice. Consult your own financial advisor, tax advisor, or attorney about your specific circumstances.

footnote 1. Federal student loan information was gathered on 3/5/2024 from studentaid.ed.gov.

footnote FAFSA® is a registered service mark of U.S. Department of Education, Federal Student Aid.